What You Need to Know About the Tax Effects of Mandatory Leave Under the New Coronavirus Act

What You Need to Know About the Tax Effects of Mandatory Leave Under the New Coronavirus Act

By Mel Schwarz, CPA, Director of Legislative Affairs at Eide Bailly

The House of Representatives recently passed The Families First Coronavirus Response Act. This act could drastically impact those affected by COVID-19 and their employers.

The Senate is expected to take up the legislation this week. President Trump has announced that he will sign the legislation as soon as it is approved by Congress.

What is the Families First Coronavirus Response Act?The Families First Coronavirus Response Act includes a number of provisions related to management of the coronavirus pandemic. The legislation also mandates that, beginning no later than 15 days after the legislation is signed by the President through the end of 2020, private employers with less than 500 employees and all public employers provide expanded qualified family and medical leave and paid sick leave for a broad range of coronavirus related absences.

Additional wages paid by private employers as a result of these provisions offset the employer’s share of old age, survivors and disability insurance taxes. Any excess over the amount of taxes due is refundable under terms to be established by the Secretary of the Treasury. Wages paid as a result of these provisions are excluded from the calculation of the employer’s share of social security (but not Medicare) taxes.

How will the Families First Coronavirus Response Act affect my organization?Changes to the Internal Revenue Code are limited to determination of credits and income. The requirements to provide paid sick leave and additional qualified family and medical leave are amendments to labor laws and are expected to be interpreted using definitions and standards established in that area. Consultation with experts in the employee benefits area should be considered.

Application to Private Employers with Less than 500 Employees

Paid Sick Leave: Private employers with fewer than 500 employees are required to provide the following:

Two weeks of paid sick leave, at the employee’s regular rate, limited to $511 per day and $5,110 in total to all employees that are unable to work or telework because they are:

Subject to a federal, state or local quarantine or isolation order related to coronavirus,

Advised by a health care provider to self-quarantine due to coronavirus concerns, or

Experiencing symptoms of coronavirus and seeking a medical diagnosis.

Two weeks of paid sick leave, at the employee’s regular rate limited to $200 per day and $2,000 in total for employees who are unable to work or telework because they are:

Caring for an individual who is subject to a federal, state or local quarantine or isolation order or has been advised by a health care provider to self-quarantine due to coronavirus concerns,

Caring for a son or daughter whose school or place of child care of the child is closed or whose child care provider is unavailable due to coronavirus precautions, or

Experiencing a substantially similar condition that is specified by the Secretary of Health and Human Services (in consultation with the Secretaries of Treasury and Labor.

The paid sick leave mandated by the legislation is in addition to paid sick leave the employer would already provide. Paid sick leave mandated by the legislation is not considered wages for the purpose of determining the employer’s share of social security taxes but will be considered wages in determining the employer’s share of Medicare taxes. An employer may elect to exclude an employee who is a health care provider of an emergency responder from these rules.

A tax credit against the employer’s portion of OASDI (social security) payroll taxes equal to the amount of sick leave wages is provided, limited to 10 days per affected employee (at $511 per day or $200 per day if caring for someone else or experiencing a substantially similar condition. Any excess over the amount of those taxes due is refundable under terms to be established by the Secretary of the Treasury. The gross income of the employer is increased by the amount of such credit.

In addition, the credit amount, under the act, would be increased by an allocable portion of an employer’s “qualified health plan expenses.” Generally, these expenses include amounts paid for a group health plan that are excludable from employees’ income. The employer’s share of Medicare tax on sick leave wages is also added to the credit amount.

The paid sick leave requirement and related credit is effective no later than 15 days after the President signs the legislation and expires at the end of 2020.

Paid Family and Medical Leave:Private employers with fewer than 500 employees are also required to provide qualified family and medical leave of up to 12 weeks to any employee who has been employed for at least 30 calendar days if the employee is unable to work or telework due to a need for leave to care for a son or daughter under the age of 18 whose school or place of care has been closed, or whose child care provider is unavailable due to the coronavirus.

After the first 10 days (which may consist of unpaid leave, be covered and paid as sick leave, or for which the employee uses some other form of paid leave) the employee must be paid at two-thirds of the employee’s regular rate of pay for the number of hours the employee would otherwise normally be scheduled to work. This paid leave requirement is limited to $200 per day and $10,000 in total.

Family and medical leave payments mandated by the legislation are not considered wages for the purpose of determining the employer’s share of social security taxes but will be considered wages in determining the employer’s share of Medicare taxes.

A credit against the employer’s portion of OASDI (social security) payroll taxes equal to the amount of qualified leave wages is provided, limited to $200 per day per affected employee and $10,000 for the year per affected employee. Any excess over the amount of payroll taxes due is refundable under terms to be established by the Secretary of the Treasury. The gross income of the employer is increased by the amount of the such credit.

As with sick leave, the tax credit amount for family leave would be increased by an allocable portion of an employer’s “qualified health plan expenses” in addition to the employer’s share of Medicare tax on the family leave wages.

The requirement to provide paid family leave and the related credit is effective no later than 15 days after the President signs the legislation and expires at the end of 2020. The Secretary of Labor may exclude certain health care providers, emergency responders and employees of businesses with less than 50 employees from the expanded qualified leave rules. This would occur when the imposition of these rules could jeopardize the viability of the business.

Application to Private Employers with 500 or More Employees

Private employers with 500 or more employees are not covered by these changes and are not eligible for credits for wages paid for sick leave or qualified family leave.

Public EmployersPublic employers are subject to the paid sick leave and paid family leave provisions without regard to the number of employees. Public employers include States, their political subdivisions and interstate governmental agencies (government employers), as well as any entity that is not a private entity or individual and is ether engaged in commerce or an industry or an activity affecting commerce. Government employers are not eligible for the credits.

How do I determine the number of employees I have?The definition of employer and determination of the number of employees follows the existing law and regulations in the Family and Medical Leave Act. Multiple entities may be treated as a single employer if they are joint employers or integrated employers as those terms have been interpreted under that Act. In general, joint employers are two or more businesses that are simultaneously benefited by an employee’s work. Integrated employers may be found where there is common management, interrelations between operations, centralized control of labor relations and common ownership.

How are individual taxes treated under The Families First Coronavirus Response Act?Tax Treatment of EmployeesAmounts received as paid sick leave or paid family and medical leave are taxable to the individual and subject to employment taxes.

Tax Treatment of Self-Employed Individuals

A refundable credit is allowed to self-employed individuals for up to ten days that would qualify for mandatory paid sick leave. The daily amount is equal to the net earnings from self-employment for the year divided by 260, and is subject to the same $511 or $200 per day limitation that applies in the case of an employee.

A refundable credit is allowed to self-employed individuals for up to 50 days the individual is unable to work because of events that would qualify for paid family and medical leave. The amount per day is equal to net earnings from self-employment for the year divided by 260, subject to a maximum of $200 per day.

There is more to come on the legislative response to CoronavirusThere are a lot of moving parts related to the final passage of this Coronavirus Response legislation. We are monitoring the bill’s progress and will be providing additional confirmed information as it becomes available.